Taking, and Opening, a Bar in Delaware

Many of you have reached out since my last blog post with questions about my upcoming move to Delaware.  One theme definitely stands out.  Does Jeff know?  Have you told your husband?  What about Jeff?  What’s Jeff going to do?

These are fair questions, as I have often been told that I am a terrible communicator.  Take this conversation last week, for example.

Refrigerator Repairman:  The freeway traffic in California is terrible.

Me:  True:  It has gotten so bad that my ex-husband moved in with his girlfriend in Culver City so he wouldn’t have to commute to West LA.

Repairman:  Oh, is that why you’re moving to Delaware?!  I guess you’re moving alone then.

Me:  (Long pause….)  No, my EX-husband.

So for those of you who have expressed concern, yes, I told Jeff.  Yes, Jeff is coming to Delaware with me!  No, I am not just going to pack him up in the car at the last minute with the dog and the hamster.  (Hey, Jeff!  Let’s go for a ride, buddy!)  He is amazing, and supportive, and all in on the Delaware move.  (And no, he does not have a girlfriend in Culver City.)

What is Jeff doing?  One of the drawbacks about Wilmington, we have heard, is that they roll up the sidewalks at sundown and there are few good places to eat or grab a drink.  Jeff is a problem solver.  So while I’m taking the bar, my husband will be opening a bar in Wilmington!   While I’m studying bar review courses, he will be scoping out the local restaurant and bar scene, refining his concept, and finding a location.  (Hard work, right…)  Hopefully by the time I’m admitted to the Delaware bar, Jeff’s bar will be open and we’ll all have a place to celebrate!

Stay tuned for more updates as the adventure continues.


Mette K.




A California Attorney Heads East

A few months ago I sent my husband another seemingly random text without warning or context. “How would you like to move from LA to Delaware?” That started a dialog, and a chain of events, and now we are packing up my family—husband, teenager, dog, hamster, electric cars—and my practice and heading east to the center of the bankruptcy universe. Wilmington, here we come!

I have already learned a lot, and we are only just getting started.

About the Delaware Bar

Applying for the Delaware bar is hard. Very hard.

There is a FBI background check. A Delaware state background check. I need to supply certified college transcripts dating back to the days of Izods, the Rubik’s Cube, and Mork & Mindy. And my original application to UCLA Law School, which I last saw on a floppy disk over two decades ago. (If I can find it, does anyone have a floppy disk reader?)

I have to supply fingerprints and a passport photo. I have to provide a list of any traffic tickets I have received in the last  decade. I will have to pass both the Delaware state bar examination and the multi-start bar examination. I have to survive a five-month clerkship process known affectionately by Delawareans as the “Scavenger Hunt.”

About Delawareans

I have also learned that Delawareans are incredibly friendly. Everyone from the local coffee shop barista to my colleagues at various Wilmington law firms have been warm, welcoming, and helpful!

About Newark

I have learned that there is a Newark, New Jersey and a Newark, Delaware. But in Delaware its pronounced New Ark. I’m not sure if this makes things more, or less, confusing.

About Mushrooms

I now know that Kennett Square, Pennsylvania, just across the Delaware border, is the Mushroom Capital of the World.

About The Bobbie

And on Friday, we discovered that ordering Mexican food anywhere east of Texas is a sketchy choice at best. (Although, in fairness, we should have known better).

The BobbieBut we also discovered an iconic Delaware sandwich, The Bobbie.  Slow-roasted, pulled turkey, cranberry sauce, homemade stuffing, and a schmear of mayonnaise on a freshly baked roll. In other words…. Thanksgiving on a roll! As the story goes, the sandwich was introduced at Capriotti’s, a sub shop in Wilmington’s Little Italy neighborhood, 40 years ago to recreate the sandwiches made by the Margolet family’s beloved Aunt Bobbie.

Stay posted for more adventures and as I continue to explore the legal and cultural landscape of my new home!

Good News for Committees… Standard Carve Out Provisions Do Not Limit Fee Awards

Over and over again the same story plays out.  A case files.  A lender carves-out a small amount from its collateral to fund Committee professionals and an investigation of the lender’s position.  That amount is inadequate, and the Committee blows past the carve-out amount.

That’s just what happened in Molycorp, where the DIP financing agreement contained a typical $250,000 carve-out provision for the Committee’s investigation of claims.

 After an extensive discovery process resulting in asserted claims, mediation, and a global settlement, the court confirmed a consensual plan and the Committee’s counsel requested payment of $8.5 million in fees.

The lender objected, arguing that the $250,000 carve-out was an absolute cap on fee payments.  The Committee responded that while the carve-out may have limited its fees in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan.  The Delaware court agreed.

The court explained that “[t]he carve-out is . . . an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets. . . .  [W]hen there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”

Here, however, a plan was confirmed. In that context, Bankruptcy Code section 1129(a)(9)(A) requires that allowed administrative claims be paid in cash (or as otherwise agreed) on the plan’s effective date.  And nothing in the carve-out language suggested that the fee cap would prohibit the allowance of administrative fees upon plan confirmation.

“If the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”

A World of Caution….

 The court contrasted the carve-out at issue with one in a DIP financing order entered in another case that stated: “[n]otwithstanding anything to the contrary therein, and absent further Order of the Court, (i) in no event during the course of the Chapter 11 Cases will actual payments in respect of the aggregate fees and expenses of all professional persons retained pursuant to an Order of the Court by the Creditor’s Committee exceed $450,000 in the aggregate (the ‘Creditors’ Committee Expense Cap’) … (iii) any and all claims (A) incurred by the Creditor’s Committee in excess of the Creditor’s Committee Expense Cap or (B) incurred by any professional persons or any party on account of professional fees and expenses that exceed the applicable amounts set forth in the Budget shall not constitute an allowed administrative expense claim for purposes of section 1129(a)(9)(A) of the Bankruptcy Code.”  At the same time, the court offered “no opinion as to whether it would approve a DIP order containing [such] provisions” had it been presented ….

See In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017).


BCBG Creditors’ Committee Organizational Meeting: March 9, 2017

Shortly before midnight on February 28, 2017, BCBG Max Azria Global Holdings, LLC and affiliates filed for Chapter 11 bankruptcy protection in the Southern District of New York. The United States Trustee has scheduled a meeting to form an unsecured creditors’ committee on March 9, 2017 in New York.

Store Closings and “Right Sizing”

The Bankruptcy Court has entered an interim order authorizing store closing sales at 120 BCBG locations, predominantly retail and factory stores. Each of the stores to be closed has historically operated at a loss. Collectively, the stores generated $10.3 million in losses in 2016, representing 63% of BCBG’s total losses from stores with a negative contribution margin. BCBG estimates the store closings will generate $20.1 million.  The liquidation sales commenced before the bankruptcy filing and are expected to continue through the end of April. It appears that, at least in the short term, about 50 of BCBG’s stores will remain open, together with a significant number of its partner shops located inside major department stores.

A Bankruptcy Sale…. Maybe?

BCBG has also filed a draft plan with a “toggle” feature, allowing for either (a) the sale of BCBG’s assets to a third party; or (b) a debt for equity conversion on terms to be negotiated.

BCBG says that it has begun marketing its assets, and it has filed a motion to approve bidding procedures. The motion includes a request to allow BCBG to provide a stalking horse bidder-if one is found-with break-up fees and expense reimbursements.  The proposed procedures, if approved, would require potential bidders to submit preliminary bid documents to BCBG and its investment banker, Jeffries, in order to receive due diligence information. They would also require interested bidders to provide non-binding indications of interest by March 30, 2017, with an auction tentatively to follow by May 22, 2017.  But the procedures proposed by BCBG and its lenders also grant them wide latitude to move forward, instead, with a debt for equity conversion… the terms of which have yet to be negotiated.

More Information

Additional information about the case, including a list of stores scheduled to be closed and the company’s proposed sale procedures and plan, can be found on the website maintained by BCBG’s claim agent, Donlin Recano.


The Perils of Using a Client Trust Account as an Informal Escrow

An escrow agreement provides protection when you want to be certain the other side will fulfill its obligations before moving forward.  People also often take shortcuts, instead placing funds into a client trust account held by one party’s counsel to be disbursed at the agreed-upon time.  Since attorneys are subject to ethics rules and serve as fiduciaries, this can be a pragmatic, less expensive alternative to a formal escrow.

But what happens when attorneys go rogue?

You may find yourself relegated to the status of an unsecured creditor with little protection.

Cosmetics Plus: A Cautionary Tale

In a recent New York case, a debtor reached a $350,000 settlement with its insurance company and placed the funds into the client trust account held by its counsel, the Dreier law firm. It so happened that the trust account also contained the proceeds of Mark Dreier’s fraud scheme.  The comingled funds totaled over $3 million at the time of the transfer, but the account balance later fell to zero before increasing to $48 million. The judge ultimately dismissed the debtor’s case and directed distribution of all cash on hand.

About two month later, before the funds were disbursed under the settlement agreement, Drier was arrested for fraud. The debtor’s new counsel quickly succeeded in having the settlement funds sent from the Dreier trust account to its trust account about two weeks before Drier landed in his own bankruptcy case.

Drier’s bankruptcy trustee then demanded the return of the $350,000 as a preferential transfer.  The insurer countered by filing secured proofs of claim in Dreier’s case asserting an interest in the returned settlement proceeds.

The New York district court ruled in favor of the trustee, holding that creditors of the original debtor were not entitled to priority claims against Drier’s estate based on the fact that the Drier had been required to hold those funds in trust, because Drier had, in fact, commingled those funds with his own and dissipated them before attempting repayment.  The transfer of the funds to the original estate was an avoidable preference, and its creditors were entitled to only general unsecured claims against Drier.  Among the arguments considered by the Court:

  1. The creditors argued that the wired funds were not property of Drier’s estate because they were required to be held in escrow for the original debtor, creating an express trust in the creditors’ favor.  The Court rejected this argument, finding that the dissipation of all funds in the account between the receipt of the settlement proceeds and the wire to the debtor’s estate made it impossible to trace creditor funds, thus defeating the preference defense.
  2. The creditors contended that the wired funds were not on account of an antecedent debt because the Dreier firm held the settlement proceeds in a fiduciary capacity.  A debt created while acting in a fiduciary capacity, they asserted, is a “special,” non-dischargeable debt.  The court rejected this argument as well, noting that a “special” debt is still a debt.
  3.  The creditors asserted that original court order requiring the Dreier firm to disburse the settlement funds gave their claims “priority” in Dreier’s bankruptcy.  The Court shot down that argument as well, noting that the bankruptcy court order did not create a security or other interest in the transferred assets.
  4. Finally, the creditors asserted that what happened to them was simply unfair, and that a constructive trust should be imposed to prevent exploitation of the bankruptcy system.  The Court’s answer?  Life is unfair.

 “While it is undisputed that Dreier breached its fiduciary duty and did grievous injury, imposing a constructive trust on its remaining assets does nothing to punish Dreier or address any arguable abuse by Dreier of the bankruptcy system. . . . Equity is not served by disadvantaging one set of victims in order to restore another, where the only source of assets is a limited common pool.”

Cosmetics Plus Group Ltd. v. Gowan (In re Dreier), 2016 WL 3920358 (S.D.N.Y. July 15, 2016)